From revenue to realignment, Abe Madkour and Tripp Mickle take a look at what the documents show about the merger of WME and IMG.

William Morris Endeavor has outlined a plan to cut $151 million in costs out of IMG after it completes its acquisition of the company, which is expected to close in the coming weeks.

The total was outlined in financial reports shared with lenders in late February and obtained by SportsBusiness Journal. The documents offer a rare, inside look at the financials of each company and break down individual business units while mapping out WME’s plan to leverage its massive $2.375 billion acquisition. The specific figure of projected cost cuts is $51 million more than the $100 million that Moody’s Investors Service projected WME would cut from IMG after acquiring the company.

Note: In millions; revenue from other divisions not separated out.
Source: IMG lending documents, as acquired by SportsBusiness Journal

2013 Cost Base

Cost of Goods Sold

Rights and guarantees: $449

Player fees and prizes: $66

Remaining cost of goods sold: $417

Overhead

Corporate (non-allocated): $78

Corporate (allocated): $76

Remaining SG&A: $313

Total Costs: $1,399

Note: In millions

Industry observers have questioned how WME could make the acquisition work at such a high purchase price and many have wondered how the company realistically could cut such a large amount of expenses from a combined company. The documents detail that plan for the first time.

Cutting costs is critical to WME’s efforts to make the IMG acquisition work. It hopes by doing so it can increase margins at IMG on earnings before interest, taxes, debt and amortization (EBITDA) from 12.4 percent to 22 percent, according to the documents.

IMG’s total expenses for 2013 are listed at $1.4 billion. The bulk of the cost cuts outlined would be made over the next year when WME hopes to slash $122 million from IMG’s expenses by consolidating operations, reducing vendors, cutting staff and eliminating excess office space. The remaining $29 million in cuts are expected to come from sales force realignment and media contracts, according to the documents.

The report says the cuts will come in waves. WME expects to cut $14 million from the business in the first six months by reducing aircraft, corporate and consulting expenses. Over the following three months, it expects to cut $55 million by restructuring the organization and cutting costs from its events, client and production businesses. By the end of the first year, it expects to eliminate another $53 million in costs through indirect spending cuts, finance cuts, human resources cuts and college contracts. It then plans to cut the additional $29 million by the end of 18 months.

WME also plans to cut $5 million of costs by reducing overhead at its own agency, which will bring total cost reductions to $156 million, according to the report shared with lenders.

“Given the necessity for cost savings as a key consideration for the investment rationale, we believe management will be aggressive in its efforts to achieve lower costs,” Moody’s analysts wrote in a credit opinion issued Feb. 27.

According to the report to lenders, the combined company will have a value of $3.5 billion. Silver Lake Partners will own 50 percent, WME will own 47 percent and the Abu Dhabi-based sovereign wealth fund Mubadala Development Co. will own 3 percent, according to the documents.

A total of $2.35 billion of debt was raised and $1.48 billion in equity was contributed to finance the acquisition and recapitalize the combined companies. Silver Lake and Mubadala contributed $461 million in new equity, while WME rolled over $1 billion in existing equity. More than $200 million in cash remains on the balance sheet.

In addition to detailing how the deal is being financed and what costs WME plans to eliminate, the documents underscore just how much larger IMG is than WME and shed light on some of WME’s plans for increasing the new, combined company’s revenue. They also shed light on the business results of IMG’s various divisions, which have long been speculated but never revealed, including details of its 7-year-old IMG College unit, as well as IMG Media and even down to its consulting and talent practices.

IMG’s total revenue of $1.57 billion resulted in EBITDA of $194 million for fiscal year 2013. The revenue was three times what WME generated a year ago, according to the documents. Last year, WME had total revenue of $513 million and EBITDA of $97 million. The report states its agency business accounts for $365 million of that revenue, while the rest comes from its investments in ad agencies such as Droga5 and Red, music licensing, and content sales and distribution.

The acquisition by the smaller WME of the larger IMG is reminiscent of the smaller Endeavor agency’s acquisition of William Morris Agency in 2009. Endeavor’s co-CEOs, Ari Emanuel and Patrick Whitesell, spearheaded that acquisition and cut $50 million in costs from the combined company. They also spearheaded the IMG acquisition and the document says that if they could remove $50 million in costs from a “company one-eighth the size of IMG,” then they should be able to cut $100 million more from a company as large as IMG.

According to the documents, WME is confident it can achieve the $151 million in cuts because IMG historically has been focused on “growth and expansion over margin and profitability” and has a “siloed, decentralized” corporate structure. AlixPartners and Accenture, whom WME hired to evaluate IMG’s business, agreed, the report says.

The Moody’s analysts said they anticipated the cost savings would “be difficult and could impact performance for a specific division or even overall results” at the new company, but they added that Endeavor’s ability to eliminate costs after acquiring William Morris Agency gave them “a degree of confidence” that WME could effectively cut costs at IMG.

The documents don’t go into great detail about WME’s plans for increasing revenue at WME/IMG. It plans to reinvigorate IMG’s client representation business in golf, tennis and other areas by leaning on WME’s track record in client representation, and it plans to consolidate sales forces and develop a bonus structure that improves sales results.

Regarding IMG College, which generated $487 million in revenue last year, WME believes it’s an undervalued space and sees an opportunity to increase advertising rates that are a third of the prices for professional sports. It also plans to sell more sponsorships by expanding the number of sponsor categories at many of its schools. It expects the company to continue to add events and acquire upcoming media rights, according to the report.

The biggest opportunity for synergy that WME sees is on the content creation and distribution front. It specifically notes in the report that IMG owns Mercedes-Benz Fashion Week and has access to hundreds of models while WME packages the shows “Project Runway” and “America’s Next Top Model.” It doesn’t outline what it would do with those ventures but says there’s an opportunity to “further develop … and monetize content.”

WME believes over-the-top buyers will drive up the value of content in the future as new digital players like Netflix and Amazon continue to acquire content. The report indicates the combined companies will have an advantage because both have a history of developing or producing content.

The documents say that WME plans to retain key IMG division heads “to ensure business continuity,” but it doesn’t mention the names of any key IMG executives. It says that Emanuel and Whitesell will lead the combined entity as co-CEOs.

IMG Sports President George Pyne and IMG College President Ben Sutton have not stated their future intentions. Neither Pyne nor Sutton returned calls seeking comment before deadline.